A Baby Step Toward A United States Of Europe

If the euro is to survive, the eurozone needs to be more like one country, and less like a bunch of different countries that happen to sit on the same continent.

European leaders just took a baby step in that direction. They agreed to create a banking union. Like many things in global finance, this sounds boring but is actually a pretty big deal.

In the eurozone today, each country regulates its own banks. That's fine in good times. But it's a problem when a country's banks are in trouble, and the country itself doesn't have enough money to step in and stabilize its financial system. This is not a theoretical problem; this is what's happening in Europe.

So last night, European leaders pulled an all-nighter and agreed (PDF) to create a banking union — to make the eurozone's financial system, at least, more like one big country, and less like a bunch of different countries. The European Central Bank will oversee the banks of all the countries in the eurozone. And the eurozone's bailout fund will be able to lend directly to banks.

The theme of this deal will need to be repeated lots more times as the eurozone struggles to save itself. Individual countries will need to keep giving up sovereignty — in this case, they will have to agree to allow officials from outside their country regulate their banks. In exchange, they will get more or better access to money — in this case, money to prop up struggling banks.

This last detail is especially important for Spain right now. Spain's banks are in trouble, and the government doesn't have enough money to support them. Europe's bailout fund recently loaned money to the Spanish government, so that the government could prop up the banks. But that loan made investors more nervous about buying Spanish bonds, which only added to Spain's troubles. The banking union means Spain's banks will be able to borrow directly from the bailout fund, which will ease the pressure on Spain's government.

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